Exemption u/s 54 cannot denied if flat construction not completed by builder

Exemption u/s 54 cannot denied if construction of flat not completed by builder within three years – ITAT

In a recent judgment, the ITAT Mumbai has held that the house buyer who intends to take the benefit of section 54 of the Act, cannot be blamed if the construction of the flat is not completed within the period of three years from the sale of the original asset.

ABCAUS Case Law Citation:
ABCAUS 4067 (2024) (06) ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the action of the Assessing Officer (AO) in denying exemption claimed by the appellant u/s 54 of the Income Tax Act, 1961 (the Act) by not allowing exemption for the amount paid for new residential flat.

The appellant assessee had sold a residential property but in her return of income for the relevant assessment year had not offered the Long Term Capital Gain but claimed the same as exempt u/s 54 of the Act and deposited the entire capital gain in the Capital Gains Account Scheme.

Further, it was noticed that the assessee purchased a new residential flat. Since the construction of the project had not started till the completion of a period of three years, the AO disallowed the claim of the assessee u/s 54 of the Act.

The CIT(A) dismissed the appeal filed by the assessee and, inter alia, directed that remedial action may be initiated in the relevant assessment year. Accordingly, on the basis of aforesaid information, proceedings u/s 147 of the Act were initiated for the relevant assessment year and notice u/s 148 of the Act was issued.

In reassessment proceedings it was observed that construction had taken place and the money invested with the developer was still lying idle, the AO made an addition of the entire amount of Long Term Capital Gain on the basis that the assessee had neither purchased nor construction any residential house/property as required for claiming relief u/s 54 of the Act.

The CIT(A), vide impugned order, dismissed the appeal filed by the assessee and held that at the time of booking of the residential property, the assessee was under no doubt that the expected time period for completion of the project is 30 months, i.e. much beyond the time of three years permitted u/s 54 of the Act from the sale of original asset.

Before the Tribunal, the assessee contended that since she had booked an under-construction residential flat within three years from the date of transfer of the original asset, therefore, she was entitled to claim exemption u/s 54 of the Act on the entire amount of Long Term Capital Gain arising from the sale of her residential flat. It was the further plea of the assessee that the construction of the flat was delayed for reasons beyond her control and due to the same exemption u/s 54 of the Act cannot be denied.

The Tribunal observed that the coordinate bench of the Tribunal, after considering CBDT’s Circular No. 471 dated 15/10/1986 and Circular No. 672 dated 16/12/1993, held that booking of a flat with a builder is to be considered as construction of the residential flat and not a purchase of a residential flat.

Further, the Tribunal observed that Hon’ble High Court after analyzing the provisions of section 54 of the Act had observed that the purpose behind the exemption under section 54(1) is that if any assessee sells his residential house and purchases a new house against those sale considerations, then capital gain tax arising out of the sale of the earlier house should not be taxed. Whether assessee himself constructs the house or he gets it constructed by a contractor or 3rd party that does not make any difference. The basic requirement for purpose of relief under section 54(1) is that the assessee should invest the sale proceeds in the construction of residential house, which has been constructed for assessee.

In view of the judicial pronouncements, the Tribunal opined that the purchase of an under-construction flat by the assessee will tantamount to investing the money in the construction of a residential house for the purpose of section 54 of the Act.

The Tribunal noted that the Revenue denied the claim of exemption on the basis that the construction of the said residential flat booked by the assessee was not completed even within the period of three years from the date of sale of the original asset, therefore, the benefit of section 54 of the Act cannot be extended to the assessee. In this regard, reference was made by the Revenue to the pre-launch offer, under which the expected time for completion of the project was mentioned as 30 months from the launch, and therefore, extends beyond three years from the date of sale of original asset.

The Tribunal further noted that Hon’ble High Court had held that completion of construction and handing over of possession within the time prescribed u/s 54 of the Act is impossible and unworkable. The Hon’ble High Court further held that if substantial investment is made in the construction of the house, then it should be deemed that sufficient steps have been taken and this satisfies the requirement of section 54 of the Act.

The Tribunal noted that the plight of the house buyer is not hidden from anyone, and in the recent past, due to one or the other reason various housing projects by well-known builders across the country were delayed for no fault of the purchaser, who continues to await the delivery and possession of his/her flat. Even in these circumstances, the house buyer, who intends to take the benefit of section 54 of the Act, cannot be blamed if the construction of the flat is not completed within the period of three years from the sale of the original asset.

However, the Tribunal opined that even if a purposive interpretation is adopted in the case of the construction of a residential house by the builder, as is also adopted by the Hon’ble High Courts, since in the present case it is undisputed that out of Long Term Capital Gain earned, the assessee only utilised partly in the new residential house, therefore, in view of the provisions of the proviso to section 54(2) of the Act the balance amount should be charged to tax u/s 45 of the Act in the year under consideration, being the year in which the period of three years from the date of transfer of the original asset expires.

Accordingly, the Tribunal directed the AO to restrict the addition on account of Long Term Capital Gain only in respect of the balance amount not utilised by the assessee for the purchase or construction of a new residential house. 

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